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A Guide to

International

Estate

Planning for

Cross-Border

Families

• U.S. Tax Basics

• International Tax and Inheritance Re-gimes

• Concepts of Citizenship, Residency, and Domicile

• Situs and its Application

• Tax Treaties and Foreign Tax Credits

• Estate Planning Strategies, Tools and Their Portability

• Non-U.S. Citizen Spouse

• Gifts/Inheritances from Foreigners

• Cross-Border Portfolio Optimization

2019

Thun Financial Advisors Research | 2018 2

Introduction

A United States expat family, a U.S. person married to a

non-citizen spouse, a non-U.S. person investing in the

United States, and other cross-border families will need to

have an investment plan that is correctly in sync with a

tailored cross-border estate plan. Correctly tailoring that

cross-border estate plan will require legal and tax experts

with a deeper understanding of the relevant estate/

succession/gift/generation-skipping transfer (collectively

referred to herein as “transfer”) tax laws in each of the rel-

evant countries that may factor in the distribution of

property prior to and upon death. These experts should

also understand the myriad techniques that can mitigate

the punitive effect of transfer taxes. This article, then, is

an introduction to the international estate planning and

investment techniques that sophisticated international

and cross-border families utilize. These topics also in-

clude cross-border issues that complicate estate planning:

transfer tax rules, treaties, and credits.

What is a Cross-Border Family?

Thun Financial uses the term “cross-

border” broadly to refer to any in-

vestment planning circumstance

that involves families of mixed na-

tionality and/or whose financial af-

fairs extend across borders. Cross-

border families include Americans

living abroad, U.S. residents of for-

eign origin, and non-U.S. residents

who are investing within the United

States. Such families commonly

have a mix of citizenships and/or

immigration statuses. Cross-border

families typically hold a range of fi-

nancial assets and business interests

that are subject to taxation in more

than one national jurisdiction.


Cross-Border Issues that Amplify the Complexity of Estate Tax Planning

U.S. Estate Tax Basics

U.S. taxation – “exceptional” in reach and scope:

America is “special” in many ways, but few aspects

of American “exceptionalism” are as tangible as

the way the U.S. Treasury levies taxes on its citi-

zens who leave its borders to live and work

abroad. While the global income taxation of U.S.

citizens gets far greater attention, U.S. transfer tax-

es apply no matter where a U.S. citizen lives, gifts

property, or dies. While expat Americans do enjoy

income tax relief in the form of the foreign earned

income exclusion, there is no transfer tax corollary

for expats. Accordingly, the expat should expect

the U.S. Treasury to impose estate tax at his or her

death upon all worldwide assets, including pro-

ceeds of life insurance policies, retirement assets,

personal property (including investments), real

estate, and other assets. Additionally, estate tax

may be owed on certain assets transferred to oth-

ers within a fixed time period before death, or

where the decedent retained an interest in the

property.

Currently, the vast majority of Americans, at home

or abroad, have little concern for U.S. federal es-

tate taxes. Recent estate tax law changes have sig-

nificantly increased the federal estate and gift tax

lifetime exclusion amount to very high thresholds:

• $11.4 million personal lifetime exemption (2019).

• Interspousal transfers: gifts and bequests (during your lifetime or upon death) between spouses are unlimited (to citizen spouse).

• Portability of unused exemption to surviving spouse: Beyond that, if the first-to-die spouse’s exemption amount is not fully utilized, an elec-tion on that estate tax return will preserve the remaining unused exemption amount for the second-to-die spouse.

Accordingly, with a $22.4 million-per-couple ex-

emption, most Americans feel that the estate tax is

something that can be ignored.

That said, the U.S. federal estate tax regime may be

described as in a state of flux, with some policy-

makers calling for its complete abolition, and oth-

ers seeking to return the exemptions to much low-

er levels. At present, the recently doubled exemp-

tions are slated to sunset in five years (2023), re-

turning to pre-2017 tax reform levels. Moreover, a

laissez-faire attitude to estate planning is far less

justified if the U.S. citizen client is married to a non

-U.S. citizen. If the non-U.S. citizen is the surviving

spouse, the unlimited marital deduction will not be

available and the likelihood of estate taxation upon

the death of the first spouse increases. Transfers

during lifetime to the non-U.S. citizen spouse can

reduce the U.S. citizen spouse’s estate, but the an-

nual marital gift tax exclusion is reduced from un-

limited to $155,000 (2019). In short, since no one

can confidently predict where the estate tax exclu-

sion, marital deduction and tax rate levels will be

in the future, ignoring estate planning based on

current tax thresholds may be a costly mistake.


Estate planning challenges for the expat and/or

multinational family: Multi-jurisdictional estate

planning issues are actually nothing new for Amer-

icans and their financial advisors: A typical afflu-

ent American family may have brokerage accounts,

savings accounts, and a security deposit box with

valuables in New York, a primary residence in Con-

necticut, a second home in Florida, and possibly

even a trust established in Delaware or South Da-

kota. Accordingly, in addition to the federal estate,

gift and generation-skipping transfer (GST) tax re-

gimes, the transfer tax regimes of multiple states

may also factor in the distribution of wealth

(during lifetime and after death) to the surviving

spouse, the children, and future generations. This

is already a complex situation, requiring the assis-

tance of legal and financial

professionals.

Now imagine that typical af-

fluent American family in a

modern, global setting: A

husband that is a United

States citizen living in Germa-

ny, married to a citizen of

France (a “non-U.S. person”),

with two children from a pri-

or marriage living in the Unit-

ed States and one from the present marriage living

with her parents in Germany. There may be real

property in various jurisdictions, separately or

jointly titled, personal property also spanning the

globe, limited partnership interests (e.g., hedge

fund, private equity, or structured products), joint

brokerage accounts, individual brokerage ac-

counts, pension funds, defined contribution plans,

IRAs, Roth IRAs, and college savings or UTMA/

UGMA accounts for the children. There are many

factors that will make the transfer tax planning

puzzle exponentially more complex for this model

global family than for the aforementioned multi-

state family.

A Brief Overview of Contrasting In-ternational Transfer Tax Regimes

Common law vs. civil law foundations: While the

estate tax laws of different U.S. states may have

critical differences (e.g., the recognition and/or

treatment of community property), these differ-

ences are subtle in comparison to the international

landscape. This is partially because all (save Loui-

siana) states share the same legal

foundation: English common law.

On the other hand, the majority

of European, Latin American, and

African nations have civil law

systems. Broadly speaking, civil

law systems are based on Roman

law, and statutes tend to be long-

er, more-detailed, and leave far

less discretion or interpretative

influence to the courts. In contrast, common law

systems tend to have more concise constitutions

and statutes and afford more discretion and inter-

pretive power to the courts when applying the

laws to the particular facts and circumstances of

particular cases.


Substantial planning flexibility in common law

regimes: In the estate planning context, common

law jurisdictions typically afford much more dis-

cretion to the individual (the settlor) to design a

scheme of distribution to those people or institu-

tions (heirs) to whom the individual desires to

pass on her wealth before or after death. Wills

are the common method of establishing a blue-

print of specific instructions for passing

(bequeathing) wealth to others (spouses, de-

scendants, friends, charities, etc.) through the

probate system. Trusts are a primary method of

devising a scheme of distribution that may allow

some or all of the decedent’s assets to bypass pro-

bate, and (sometimes) to defer or avoid estate

taxation. In common law jurisdictions, it is usually

the estate of the decedent that is taxed prior to

distribution of wealth to chosen heirs. If the dece-

dent fails to construct a legally valid will (a situa-

tion known as intestacy), trust or other will-

substitute scheme (e.g., joint titling all property),

the state intestacy laws will direct the distribution

of the decedent’s property.

Succession and forced heirship dominate civil

law and other regimes: Civil law countries tend

to follow a succession regime, also known as

forced (or Napoleonic) heirship. This is analogous

to the intestate succession rules followed in com-

mon law when the decedent has otherwise failed

to legally direct the distribution of wealth upon

death. These regimes are obviously quite differ-

ent, for the decedent in a civil law country may

have little or no say in the distribution of all (or


most) of the wealth accumulated (or previously

inherited), during her lifetime. Moreover, civil law

succession regimes tend to prefer to impose tax

upon inheritance (i.e., upon the heirs) at the time of

distribution of the decedent’s estate rather than

impose tax upon the estate of the decedent prior to

the distribution of the decedent’s estate. Finally,

the concept of a trust is likely to be of little or no

legal validity in a succession regime.

Given the critical fundamental legal differences in

the distribution and taxation regimes around the

world, it should come as little surprise that a fami-

ly’s existing estate plan (designed for one legal sys-

tem) may quickly become outmoded, ineffective,

and even counter-productive once the family relo-

cates overseas (and becomes subject to a com-

pletely different legal system).

Concepts of Citizenship, Residency and Domicile

Concepts of citizenship, residency and domicile

have crucial significance in determining the expo-

sure of a person to the transfer tax regime of any

particular country. An expat should understand

the particular definitions and requirements under

the laws of the country(ies) in which they live,

work, or own property. Naturally, the likelihood

that the effectiveness of an American’s existing es-

tate plan will deteriorate will depend not only on

where the family relocates, but also on how much

the family integrates its wealth/assets/

investments into the new country of residence, and

for how long the expat family remains (or plans to

remain) in the new country of residency. For ex-

ample, the UK has three residence statuses that

impose different rules based on length of residen-

cy or election of status: resident, domiciliary, or

deemed domiciliary. The particular status of the

taxpayer will have significant income and transfer

tax consequences, and of course, the particular dis-

tinctions vary by country.

In the United States, there is an objective test for

determining whether a person is a U.S. resident for

income tax purposes (the “substantial presence”

test) that measures the days of the tax year that

the taxpayer was physically within the United

States.

Transfer taxes are more closely tied to the concept

of domicile rather than residency. Domicile is ac-

quired by living in a jurisdiction without the pre-

sent intention of leaving at some later time. Resi-

dency, without the requisite intention to remain,

will not create domicile, but domicile, once creat-

ed, will likely require an actual move outside the

country (with intention to remain outside) to sever

it. Accordingly, for an immigrant to attain estate

tax residency in the U.S., the person must move to

the United States with no objective intention of lat-

er leaving. Permanent resident (green card) status

would in most (but not necessarily all) cases estab-

lish domicile. In practice, there is no bright-line

test for non citizens to establish domicile. U.S.

Courts have looked at a number of factors in deter-

mining the domicile of a decedent.


Transfer Tax Situs Rules, Treaties and Foreign Tax Credits

The transfer tax implications for the expat’s (or

non-U.S. person’s) property will depend upon the

interplay of:

• The nature or character of the assets;

• The assets’ physical locations;

• The applicability of an estate (and/or gift) tax

treaty between the U.S. and the country of resi-

dence, domicile and/or citizenship; and

• The availability of tax credits in the relevant

jurisdictions where overlapping taxes are lev-

ied.

Understanding the Role of Situs in International Transfer Taxation

While U.S. citizens and residents are subject to fed-

eral estate tax on worldwide assets, the non-

resident alien’s estate is subject to federal estate

tax only on U.S. situs assets, consequently “situs”

has an important role to play in estate planning for

many cross-border families.

Expats Living in Europe and E.U. Directive 650/2012:

As of August 17, 2015, U.S. citizens living in the E.U. can elect the probate/succession laws of

either their country of residency or their country of citizenship to govern the distribution of

all of their wealth.

• Provides greater clarity – one country’s courts will have jurisdiction and its laws will ap-

ply to the transfer of assets.

• Creates a European Certificate of Succession which is recognized in all participating EU

countries to clearly demonstrate the heirs, legatees, executors of the will or the adminis-

trators of the estate.

• Avoids the Napoleonic “heirship” system for those living in countries (e.g., France) where

the law mandates a majority of assets passing to children.

• Must update your Will and specify the election. Have an official notary in residence

country confirm the Will complies.

• Denmark, Ireland and the UK opted out of this arrangement. Applies to U.S. citizens resid-

ing in other Eurozone countries.

• Warning: Does not alter the path or nature of transfer (estate/inheritance) taxes upon

your death (in U.S. and E.U. country of residence) nor does it cover trusts.

For more information see: the New EU Succession Rules

What is “Situs”?

Situs is Latin for “position” or “site.” In the law,

it is a term that refers to the location of the

property for legal purposes.

https://ec.europa.eu/info/strategy/justice-and-fundamental-rights/civil-justice/family-law/successions-and-wills_en

https://ec.europa.eu/info/strategy/justice-and-fundamental-rights/civil-justice/family-law/successions-and-wills_en


Situs generally: The general situs rule is that tan-

gible assets physically located in the U.S. are sub-

ject to federal estate tax, but the situs rules for in-

tangible property are somewhat involved and

complicated. For instance, an asset can be non-U.S.

situs for gift tax purposes but U.S. situs for estate

tax purposes. Here are the general situs guidelines

for non-resident aliens and their U.S. estate tax ex-

posure:

• Real Property – Land, structures, fixtures and

renovations/improvements located in U.S. are

U.S. situs.

• Tangible Personal Property – property physi-

cally inside the U.S. is U.S. situs. This includes

physical dollars or other currency.

• Intangible Personal Property – U.S. situs will

depend on the character of the investment:

Business Investment Funds – funds used in con-junction with a U.S. trade or business and held in bank or brokerage (including domestic branches of foreign banks), are U.S. situs.

Personal Investment Funds, including:

Checking or Savings – demand deposits in U.S. banks are non-U.S. situs, while money market funds or cash in a brokerage account are U.S. situs.

Qualified Retirement Plans – if funded through U.S. employment are U.S. situs.

Stock – if issued by a U.S. corporation, are U.S. situs, even if stock certificates are held abroad. (Stock/ADRs in non-U.S. corporations are non-U.S. situs assets, even if purchased and/or held in the U.S.)

Bonds – The U.S. passed a law in 1989 that cre-ated a “portfolio exemption” for publicly traded bonds, including treasuries, so they will not be considered U.S. situs. Privately offered debt in-struments issued by U.S. organizations may still

be considered U.S. situs.

Life Insurance – if issued by a U.S. licensed in-surance company, the cash value of a life insur-ance policy is considered a U.S. situs asset, while the death benefit is a non-U.S. situs asset.

Annuities – if issued by a U.S. licensed insurance company will be considered U.S. situs assets (Policies issued by foreign-licensed insurance companies abroad will not be U.S. situs assets).

The U.S. situs rules are particularly instructive for

expat families that include non-U.S. persons (e.g.,

an American abroad married to a foreign spouse),

or to non-U.S. persons with investments in the

United States. Moreover, while each sovereign has

their own rules and interpretations of situs rules,

the U.S. regime can be somewhat instructive for

other countries’ situs rules. While a country-by-

country discussion of the situs rules is beyond the

scope of this article, many jurisdictions employ si-

tus rules similar to the U.S.

The Interplay of Tax Treaties and Foreign Tax Credits on Cross-border Estates Currently, the United States has estate and/or gift

tax treaties with sixteen sovereign nations (see Ap-

pendix A). These treaties serve several important

roles in determining the transfer tax consequences

of assets held within the cross-border estate, and

may provide a meaningful reduction in the estate

taxes by mitigating double taxation and discrimi-

natory tax treatment while allowing for reciprocal

administration. The treaty will control which trea-

ty country can assess transfer taxes by either:


• Determining which country is the decedent/

donor’s domicile for transfer tax purposes;

• Determining in which country the property is

deemed to be located.

Certain estate tax treaties relieve some of the bur-

den that occurs when a surviving spouse is a non-

resident upon the death of the U.S. spouse by in-

creasing the marital deduction for non-resident

spouses. Moreover, where both countries have a

claim and assess taxes, a tax credit regime may op-

erate to eliminate or at least reduce double taxa-

tion.

These treaties among the pertinent jurisdictions

will alter the path of estate planning. The estate

planning team must evaluate the interplay of the

relevant transfer tax regimes and the pertinent

treaty to determine the transfer tax outcome in

consideration of not only the nature of the proper-

ty and its location, but also the impact of citizen-

ship and domicile on net tax outcomes. It is ex-

tremely important to remember that the filer must

specify any specific benefit under the treaty that is

being claimed in the actual tax filings; otherwise,

the presumed benefit is lost.

Estate tax treaty “tiebreakers” and the new/old

situs rules: Another key effect of tax treaties is

that they establish tie-breaker rules. How those

tiebreaker rules operate will depend on whether

the treaty follows the newer or the older situs

rules in U.S. estate tax treaties.

Generally, more recently ratified U.S. estate tax

treaties follow the “new” rules based upon a domi-

cile-based approach. These include the treaties be-

tween the United States and Austria, Denmark,

France, Germany, the Netherlands, and the United

Kingdom. The treaty rules establish taxation prior-

ity by first determining which jurisdiction was the

domicile of the decedent. The domiciliary country

may tax all transfers of property within the entire

estate, while the non-domiciliary country may only

tax real property and business property with situs

in that country. The domiciliary country will then

provide foreign transfer tax credits for taxes paid

to the non-domiciliary country.

The older treaties (including Australia, Finland,

Greece, Ireland, Italy, Japan, Norway, South Africa

and Switzerland) follow the more elaborate na-

ture/character situs rules described above for non

-resident alien property in the United States. Con-

versely, the situs rules of the foreign jurisdiction

will apply to that portion of the U.S. person’s estate

that is deemed to have situs in that foreign juris-

diction. These treaties are far from uniform, and

some treaties eliminate double taxation better

than others. Generally, these older treaties provide

for primary and secondary credits to be applied to

reduce double taxation: the non-situs country

(where the property is not located) will grant a

credit against the amount of tax imposed by the

country where the property is located. Additional-

ly, the countries may provide secondary credits

where both countries impose tax because their in-

dividual situs laws determine that the property

has situs in both (or even in neither) country.


Foreign tax credits in the absence of an estate

tax treaty: In the absence of a treaty (the majority

of jurisdictions), the potential for double taxation

increases, but foreign transfer tax credits may still

provide some relief from double taxation. The

availability of a U.S. foreign tax credit will hinge

upon:

• Whether the property is situated in the foreign

country;

• Whether the property is subjected to transfer/

death taxes; and

• Whether the property is properly included in

the gross estate.

There is also the potential that a foreign transfer

tax credit could be unavailable because of a Presi-

dential proclamation based on the foreign coun-

try’s failure to provide a reciprocal tax credit to

U.S. citizens. (For more information, please see the

relevant portions of the U.S. Tax Code including 26

U.S. Code § 2014 “Credit for foreign death taxes”).

Estate Tax Planning Strategies: Cross-Border Pitfalls and Considerations

Traditional Estate Planning Tools

The solutions or tools of estate planning and

wealth management that could be utilized in any

given situation may include (but by no means are

limited to):

• Wills (either a U.S. Will, or a U.S. Will accompa-

nied by a “situs Will” where the expat has accu-

mulated property);

• Trusts (living or testamentary, grantor or non-

grantor, revocable or irrevocable, QDOT);

• Life Insurance (whole, universal, second-to-die,

using irrevocable life insurance trust (ILIT) for

business planning, retirement, estate preserva-

tion);

• Gifting Strategies (charitable, inter-spousal and

trans-generational gifting);

• College Savings Plans (a 529 gifting strategy

can be an extremely effective estate tax plan-

ning tool, particularly for grandparents and

great-grandparents);

• Personal Investment Companies (PICs); and

• Cross-portfolio investment optimization (the

right investment in the right type of account

and in the right owner’s account).

Most of these tools are very familiar and frequent-

ly utilized by domestic financial planners and es-

tate planning attorneys to assist single and multi-

state U.S. families. The utilization of offshore PICs

is generally no longer utilized for U.S. clients, be-

cause Passive Foreign Investment Company (PFIC)

rules and the Foreign Account Tax Compliance Act

(FATCA) create income tax problems that vastly

outweigh any estate planning benefits. (for more

information see Thun Research’s article on PFICs).

http://thunfinancial.com/american-expats-tax-nightmare/


However, PFICs may be instrumental in the finan-

cial plan of a non-U.S. person investing within, or

outside of, the United States.

Examples of Estate Planning Tools that May Not Travel Well

Perhaps one of the more dangerous routes that an

expat family could take would be to rely upon the

estate planning that was done before leaving the

United States. It is generally advisable to review an

existing estate plan (and the broader financial

plan) when major events (divorce, remarriage,

etc.) have resulted in changed circumstances, but

the importance increases with a relocation over-

seas, or a move from one foreign country to anoth-

er. U.S. expats need to be aware that standard U.S.

estate planning techniques will likely fail to protect

wealth in cross-border situations and may even pro-

duce unintended, counter-productive results.

These are issues that extend beyond the scope of

this guide, but certain issues can be discussed to

illustrate the nuances involved in cross-border es-

tate planning. As the fact patterns (citizenship,

domicile residency, marital history, assets, etc.) of

the global family change, so will the tax implica-

tions and the available solutions.

Utilizing wills in international estate planning:

Naturally, the will is one of the more common and

widely utilized estate planning tools in the United

States. A traditional will provides written direc-

tions on how the individual (the “testator” of the

will) wishes to distribute her assets upon her

death. While different states have specific legal re-

quirements for executing a will with legal effect,

generally the requirements are straightforward:

• That the testator be legally competent and not

under undue influence;

• That the will describe the property to be dis-

tributed; and

• That the will be witnessed by the requisite

number of witnesses.

In addition to testamentary wills, living wills

(powers of attorney) are also utilized to direct who

can make decisions for the individual in the event

of physical or mental incapacity. The complexity

and sophistication of traditional and living wills

varies greatly, and any individuals with estates

that may approach the levels that trigger any

transfer taxes (which may be substantially lower

in many foreign countries), or anyone who wants

to make sure that their wishes are given legal ef-

fect, would be well advised to seek legal counsel

regarding the drafting and execution of their will.

Within the cross-border context, individuals would

be wise to seek legal counsel with a specialized fo-

cus on estate planning in the relevant jurisdictions.

Some experts on the subject of international estate

planning suggest multiple “situs” wills, with each

will governing the distribution of property in the

country for which the will is executed. There

seems to be some risk in a strategy of multiple

wills, as the traditional rule holds that the legal ex-

ecution of a will extinguishes the validity of any

prior will. Other experts suggest one “geographic

will,” which would incorporate the laws of the rele-

vant jurisdictions involved in the distribution of

the testator’s assets. The propriety or effectiveness


of the geographic will is likely to depend on the

particular laws of the relevant jurisdictions and

the particular expertise of the legal advice that

went into the design and execution of the will.

Caution when moving overseas with trust struc-

tures: If your estate plan includes trusts, it is par-

ticularly dangerous to move overseas with your

old domestic estate plan in tow as it may not travel

well at all. For example, consider a U.S. citizen who

established a revocable grantor trust in favor of his

children and grandchildren, but who thereafter

moves to live and work overseas. There may be

extremely negative consequences (e.g., the trust

may be separately taxed upon the grantor obtain-

ing residency in the new country), and those con-

sequences will vary depending on where the expat

relocates and how long the expat and his or her

family remain in their new country of residence.

In civil law/forced heirship regimes, a fundamen-

tal problem exists when examining distributions to

heirs through such a trust: the beneficiary is re-

ceiving the property from the trust, rather than a

lineal relative (parent, grandparent, etc.). Accord-

ingly, if the expat grantor moves to Germany with

her family, the children-beneficiaries will be Ger-

man residents and the intended consequences of

the grantor trust will conflict with German gift and

inheritance tax laws. This exposes distributions

from the trust to potentially higher German trans-

fer taxes. The magnitude of unintended tax conse-

quences might intensify over time. If the grantor

and his beneficiaries remain in Germany over ten

years, the tax relief offered by the U.S.-Germany

Estate and Gift Tax Treaty phases out and distribu-

tions from the trust could be exposed to the high-

est German transfer tax rate of fifty percent. Simi-

lar results may occur in France, which has a rela-

tively new tax regime applicable to any trust with

French situs assets or a French domiciled settlor or

beneficiary. There have been recent reforms in

several civil law jurisdictions designed to better

accommodate immigrants’ trusts, but uncertainties

and complications remain.

The dangers are not limited to the expat who relo-

cates to a civil law jurisdiction. If a U.S. citizen ar-

rives in the U.K. (a common law jurisdiction) with

an existing U.S. trust, the government may not rec-

ognize this trust structure, or, worse, consider the

trust a UK resident and subject the trust assets to

immediate income taxation on the unrealized gains

within the trust. Moreover, If the trust provides for

a successor U.S. trustee, then a settlement

(triggering UK capital gains taxes) could also be

declared on the death of the UK resident trustee

(the grantor). Additionally, in Canada, which

shares the British common law heritage, a special

capital gains tax will be periodically assessed on

trusts holding Canadian real property.


Gifting strategies (e.g. 529s) to reduce your tax-

able estate: Lifetime gifting strategies are a com-

mon method for reducing a taxable estate in the

United States. Section 529 college savings plans

(see Thun Financial’s research article on 529 Plans

for ex-pats) have grown substantially in popularity

over recent years, as parents begin to realize the

tremendous long-term advantages to saving larger

amounts for college in earlier years for their chil-

dren, and 529 accounts allow substantial deposits

(as much as $150,000 in a one-time gift from joint

filers covering a five-year period) and provide

Roth IRA-style tax-free growth of the investment

account, provided that the 529 plan assets are

withdrawn for qualified educational expenses.

Moreover, grandparents and great-grandparents

can employ a 529-plan gifting strategy to shrink

the taxable estate and to pass on wealth to grand-

children and great grandchildren (otherwise “skip

classes” that would trigger generation skipping

transfer (GST) taxes in addition to estate or gift

taxes). In short, Section 529 college savings ac-

counts provide tremendous income and transfer

tax-advantaged gifting opportunities to accomplish

multigenerational wealth transfer. They also pro-

vide the donor with control over the use of the gift-

ed proceeds and flexibility regarding the designa-

tion of account beneficiaries.

However, while U.S. expats are free to open and

fund 529 college savings accounts, they must be

aware of the local country rules in their country of

residence regarding the gains that will eventually

accumulate within these accounts. From an in-

come tax perspective, it is worth mentioning here

that there are no treaties between the United

States and any foreign jurisdiction that recognizes

the tax-free growth of investments in 529 accounts

(or Coverdell ESAs – another type of U.S. savings

vehicle for education expenses allowing much

smaller annual contributions). Therefore, it is

quite possible that the expat individual will find

that gifting through a 529 plan could create detri-

mental tax consequences, as the donor may poten-

tially incur tax liability on any investment gains in

the portfolio going forward (recognized or unrec-

ognized gains, depending on the local tax rules).

Alternative college savings or generational gifting

strategies (including having U.S. based relatives

open the 529 account) may work better for expats.

http://thunfinancial.com/american-expat-college-savings-529-plans

http://thunfinancial.com/american-expat-college-savings-529-plans


Estate Planning For Families That Include a Non-U.S.-Citizen Spouse

Americans living abroad may accumulate more

than income and assets while living and working

abroad, they may also find love! Unfortunately, the

tax complications and challenges facing American

expats also extend to the circumstance of marrying

a foreigner. Even if an expat’s spouse obtains U.S.

permanent resident (“green card”) status, gifts and

bequests to the non-citizen spouse are not eligible

for the unlimited marital deduction. On the other

hand, the $11.4 million (2019) lifetime exclusion

applies to bequests left to anyone, including a non-

citizen spouse. For estates larger than the lifetime

exclusion limit, alternative estate planning strate-

gies may be required, two of which are discussed

below.

Lifetime gifting to the non-citizen spouse: First,

although a citizen can give unlimited assets to a

fellow citizen spouse during her lifetime, there is a

special limit allowed for tax-free gifts to non-

citizen spouses of $155,000 annually (2019). Ac-

cordingly, a gifting strategy can be implemented to

shift non-U.S. situs assets from the citizen spouse

to the non-citizen spouse over time, thereby

shrinking the taxable estate of the citizen spouse.

The nature, timing, and documentation of the gifts

should be done with the assistance of a knowl-

edgeable tax and/or legal professional.

Qualified domestic trust (QDOT) – an important

tool for marriages between a U.S. citizen and a

non-citizen spouse: A QDOT is a type of trust de-

signed to afford the surviving spouse the ability to

claim use of and income from the decedent

spouse’s estate during the lifetime of the surviving

spouse, but then the QDOT assets will pass to the

original decedent’s heirs upon the death of the sur-

viving spouse. With a QDOT, only distributions

from principal during the surviving spouse’s life

and at the surviving spouse’s death are subject to

estate tax (insofar as they exceed the original dece-

dent spouse’s exclusion). Accordingly, the QDOT

can be a critical wealth planning tool for deferring

the estate tax until distribution to eventual U.S. cit-

izen heirs when the surviving spouse is a non-U.S.

citizen.

The QDOT can be created by the will of the dece-

dent or the QDOT can be elected within 27 months

after the decedent’s death by either the surviving

spouse or the executor of the decedent’s estate. If

the QDOT is created after decedent’s death, the

surviving spouse is treated as the grantor for in-

come and transfer tax purposes. Certain transfer

tax treaties provide spousal relief that may lessen

the need for a QDOT, and, if the treaty benefit is

claimed, the QDOT may no longer be utilized.

It should also be noted that, while the QDOT trust

can certainly be a useful tool for arranging for the

eventual transition of the U.S. estate to U.S. citizen

heirs while providing maintenance for the surviv-

ing non-citizen spouse, the tax and maintenance

consequences may pose considerable negatives

that outweigh the benefits of setting up the trust

arrangement. The cross-border family may have

alternative solutions for providing for the heirs

and for the maintenance of the non-citizen spouse


that are more practical or even more tax efficient

(such as a lifetime gifting strategy, discussed

above). The personal and financial merits of the

QDOT and alternative planning tools must be ana-

lyzed on a case-by-case basis.

Gifts/Inheritances from Foreigners

In contrast with many succession/heirship-based

transfer tax systems abroad, gifts and inheritances

in the United States are not taxed to the benefi-

ciary of the gift or bequest, because we have a

transfer tax system that taxes these transfers at

the source of transfer (i.e., the donor, grantor, or

the estate). For transfers on death, in addition to

receiving the distribution tax free, the beneficiary

of a bequest will receive what is known as a “step-

up in basis” to the fair market value of the asset on

the date of death (or the alternative valuation date,

6 months after the date of death). For gifts, the re-

cipient takes the donor’s original cost basis.

For the American taxpayer (citizen or resident)

inheriting or receiving a gift from a foreign person,

the general rule still applies: no income or transfer

tax will be due at the time of receiving the gift or

inheritance, and the beneficiary receives the do-

nor’s basis in a gift or receives a full step-up in ba-

sis in a bequest. However, the American taxpayer

needs to be mindful that special disclosure rules

apply to gifts or bequests received from foreign

persons (or entities). If the American taxpayer re-

ceives annual aggregate (can be from multiple do-

nors/grantors/testators) gifts above $16,388

(2019) from a foreign corporation or partnership,

or aggregate gifts or bequests from a non-resident

alien or foreign estate exceeding $100,000, the tax-

payer must report the amounts and sources of

these foreign gifts and bequests on IRS Form 3520,

which must be filed at the time that the income tax

is due, including extensions. Not unlike the FBAR,

this disclosure requirement is designed to help the

U.S. CITIZEN U.S.

PERMANENT RESIDENT

NON-RESIDENT ALIEN

Tax on Worldwide As-sets

Tax on Worldwide Assets

Tax on U.S. SITUS Assets

Exemption: $11.4 million

Exemption: $11.4 million

Exemption: $60,000

Unlimited Spousal Transfers

(If beneficiary is U.S. Citizen)

$155,000/year Exempt Spousal

Transfers (Non-Citizen Spouse or use

QDOT)

$155,000/year Ex-empt Spousal

transfers (Non-Citizen Spouse

or use QDOT)

The Various Gift and Tax Considerations Depending on U.S.

Residency and Citizenship


IRS flag substantial income that may have been

mischaracterized by the taxpayer so that the IRS

may further investigate and verify the nature and

character of the transactions.

Non-U.S. Persons Investing in the United States

Even modest foreign investments in the U.S. may

raise transfer tax issues: When non-U.S. persons

own U.S. situs assets, including real estate, U.S. cor-

poration stocks, and tangible personal property

(e.g., collectibles) that remain in the United States,

they are generating a U.S. estate – one with a con-

siderably miniscule exemption of only $60,000. If

the investor resides in 1 of the 16 estate tax treaty

countries, there may be significant relief, however.

Accordingly, and perhaps ironically, non-

Americans are more likely to trigger federal trans-

fer tax liability than a similarly situated U.S. citizen.

While the foreign investor in the U.S. may become

very aware of the federal (and possibly state) in-

come tax regime, she might be well served by

learning the particulars of the federal (and possi-

bly state) estate tax regimes that could impact the

distribution of those investments to her heirs.

More sophisticated estate planning tools become

necessary at more modest estate levels whenever

the assets of a non-U.S. person are concerned.

Non-resident foreign (NRA) investors in U.S. real

estate: The United States can provide a very at-

tractive market for investing in securities. For ex-

ample, the situs rules discussed earlier illustrate

that investments in U.S. publicly traded fixed-

income (bonds) will not subject the foreign inves-

tor to estate taxes (nor income taxes). However,

the United States has not extended the investor-

friendly income and estate tax rules to foreign in-

vestment in U.S. real estate. As mentioned previ-

ously, foreign direct ownership of U.S. real estate

will subject the non-resident’s estate to U.S. estate

tax. Frequently, it will make sense to own U.S. Real

Estate through an offshore corporate or trust

structure (for a foreign, non-resident investor on-

ly, as U.S. persons should certainly avoid offshore

corporate or trust structures) to avoid U.S. estate

tax, and possibly reduce U.S. income tax as well.

From an income tax perspective, direct ownership

of investment real estate will subject the foreign,

non-resident investor to preparing the annual fed-

eral income tax (U.S. 1040-NR) and state income

tax return. More concerning, it will also subject

the foreign, non-resident to a more complicated

tax regime – the Foreign Investment in Real Prop-

erty Tax Act (FIRPTA) – which creates a myriad of

tax headaches that are well beyond the scope of

this article. This example merely highlights that

certain classes of investments may be subject to

more draconian reporting and taxation rules than

other investments. Ultimately, competent financial

planning and investment management must recog-

nize and design an investment plan that takes full

consideration of the cross-border tax issues.


Cross-Portfolio Investment Optimization

While non-U.S. investors and non-citizen spouses

present obstacles for certain common traditional

estate planning tools (e.g., joint ownership),

knowledge of U.S. situs rules can be utilized to con-

struct family portfolios that are particularly U.S.

income tax and U.S. estate tax efficient. Despite its

importance, cross-portfolio investment optimiza-

tion is something that is seldom discussed in a

meaningful way, much less implemented effective-

ly.

In addition to optimizing after-tax returns, a holis-

tic approach involving all of the various accounts

available to cross-border investors (brokerage,

IRA, etc.) can also help with transfer taxes. For ex-

ample, to return to the aforementioned global fam-

ily from earlier (U.S. husband, French wife, and

child living in Germany, with two U.S. children

from husband’s prior marriage living in the U.S.),

the tax-conscious financial plan can go beyond the

routine suggestion of a QDOT, and actually design

investment portfolios that will minimize potential

income and transfer taxes in a comprehensive

wealth management strategy. The U.S. husband’s

portfolios might be over-weighted in certain asset

classes including U.S. stocks or ETFs, while his

wife’s portfolio might be overweight bonds, inter-

national equities, or non-U.S. ETFs).

This approach can allow for superior after-tax re-

turns to help achieve important lifetime goals and

greater wealth transfer to heirs. Solutions can even

be modified with sophisticated ownership struc-

turing (e.g., the wife might own securities through

a trust or offshore company), all designed with the

assistance of legal and tax advice from competent

consultants in the relevant jurisdictions. Indirect

ownership can be a particularly effective means

for non-U.S. persons to own U.S. real property, too.


Conclusion

Cross-border families and multinational asset portfolios add

substantial complexity to the financial planning needs of global

families. Citizenship/domicile/residency, location and character

of investments (situs of assets), applicable tax treaties and/or

the availability of foreign tax credits, and the existing or pro-

posed estate plan are some of the critical variables that must be

factored into a financial plan and in the design of a comprehen-

sive portfolio that is optimized for income as well as transfer tax

efficiency. The savvy expat or multinational investor also needs

to understand that the standard U.S. estate plan may no longer

protects wealth as intended. A new team of expert trusted advi-

sors is going to be required. This new team of expert trusted ad-

visors should possess a combination of cross-border legal, tax,

and financial planning expertise in order to tailor a financial

plan, an estate plan, and an investment strategy that is harmoni-

ous with the multijurisdictional taxation regimes to which the

expat or multinational investor’s wealth is now subject.

Thun Financial Advisors Research is the leading provider of financial planning research for cross-border and American

expatriate investors. Based in Madison, Wisconsin, David Kuenzi and Thun Financial Advisors’ Research have been fea-

tured in the Wall Street Journal, Emerging Money, Investment News, International Advisor, Financial Planning Magazine

and Wealth Management among other publications.

Please visit our website for the most up –to-date articles and press or email us with any additional questions.

Contact Us Thun Financial Advisors 3330 University Ave Suite 316 Madison, WI 53705 608-237-1318

Visit us on the web at

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http://thunfinancial.com/american-expat-financial-advice-research-articles/

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mailto:[email protected]?subject=Research

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• Armenia • Australia* • Austria* • Azerbaijan • Bangladesh

• Barbados

• Belarus

• Belgium

• Bulgaria

• Canada*

• China

• Cyprus

• Czech Republic

• Denmark*

• Egypt

• Estonia

• Finland*

• France*

• Georgia

• Germany*

• Greece*

• Hungary

• Iceland

• India

• Indonesia

• Ireland*

• Israel

• Italy*

• Jamaica

• Japan*

• Kazakhstan

• Korea

• Kyrgyzstan

• Latvia

• Lithuania

• Luxembourg

• Mexico

• Moldova

• Morocco

• Netherlands*

• New Zealand

• Norway*

• Pakistan

• Philippines

• Poland

• Portugal

• Romania

• Russia

• Slovak Republic

• Slovenia

• South Africa*

• Spain

• Sri Lanka

• Sweden

• Switzerland*

• Tajikistan

• Thailand

• Trinidad

• Tunisia

• Turkey

• Turkmenistan

• Ukraine

• Union of Soviet Socialist Republics (USSR)

• United Kingdom*

• Uzbekistan

• Venezuela

*Indicates a bilateral estate and/or gift tax treaty or protocol

As of the 2018 edition of this report, this was the most current information available on the irs.gov

website. Visit the IRS’s website for the most current and up-to-date official information available.

Appendix A: List of U.S. Bilateral Tax Treaties

https://www.irs.gov/Businesses/International-Businesses/United-States-Income-Tax-Treaties---A-to-Z

https://www.irs.gov/Businesses/International-Businesses/United-States-Income-Tax-Treaties---A-to-Z

DISCLAIMER FOR THUN FINANCIAL ADVISORS, L.L.C., investment ADVISOR

Thun Financial Advisors L.L.C. (the “Advisor”) is an investment adviser registered with the United States Securities and Exchange Commission (SEC). Such registration does not imply that the SEC has sponsored, recommended or approved of the Advisor. Information con-tained this document is for informational purposes only, does not constitute investment advice, and is not an advertisement or an offer of investment advisory services or a solicitation to become a client of the Advisor. The information is obtained from sources believed to be reli-able, however, accuracy and completeness are not guaranteed by the Advisor.

Thun Financial Advisors does not provide tax, legal or accounting services. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions.

Thun Financial Advisors, LLC

www.thunfinancial.com

3330 University Avenue, Madison, WI 53705

608-237-1318

Skype: thunfinancial

Copyright © 2018 Thun Financial Advisors, LLC

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